BUYING AND SELLING A BUSINESS: PART 2: Seller’s Preliminary Consideration

In our last Article of this series on Buying and Selling a Business, we covered the Buyer’s preliminary considerations when deciding whether to buy an existing business or start from scratch. Today we cover the Seller’s preliminary considerations.

As always, if you have any questions about your real estate, business, estate planning, or any other legal issue, please let us know by e-mailing me at kbdunnagan@bpelaw.com.

Also, remember that we do legal presentations for business and community organizations. If your group would like this, please contact me or Steve to setup a date and time.

Selling an ongoing business is a major transaction that has a large number of issues to be resolved as a part of the process. But before that transaction can begin, the potential Seller must consider several preliminary questions that will determine everything to follow.

Today we’ll address the preliminary considerations for any business Seller. These are:

1. Can I Sell?
2. Should I Sell?
3. What will I Do after I Sell?

1. CAN I SELL?
In my last Article, I referenced that over 540,000 new businesses start-up each month but that 70% of new start-ups are gone by year 10. Of the survivors, many will be listed at some point as being for sale. Statistically only 20% of those businesses will actually sell. Will it be yours?

Pros:
– There is a market – while this can vary widely by the type, strength, and location, there is a market available for most businesses. The challenge is reaching an agreement with a prospective buyer as to price and terms.
– Source – of the universe of prospective buyers, the most common source are three: (1) existing staff members; (2) 3rd parties who want to enter this business; and (3) merger partners who may already be competing in your market place and would find it attractive to acquire the business rather than competing.
– Available Consultants – In many business sectors, there are experienced consultants and business brokers that can value and market your company and who may have an existing database of prospective buyers.

Cons:
– what is market value – Sellers often have an unreasonably inflated belief in their business’s value. This is typically the product of the Seller having both created and nurtured the Company as well as the benefits that the Seller may be giving up in a sale.
– will Seller have ongoing liability – this is a critical evaluation that will shape the sale. The buyer typically will want insulation by the Seller from any liabilities which arise from pre-sale business operations, both known and unknown.

2. SHOULD I SELL?
Selling a business involves a large number of trade-offs which the Seller must consider before putting the business on the market

Pros:
– Free up capital – Many business owners find themselves asset rich and cash poor. Selling the business can free up that value and enable the Seller to pursue other opportunities.
– Free up time – Operating a business can be very time consuming. Selling gives the Seller the time to pursue those other opportunities as well as “Bucket List” items such as travel, hobbies, and other dreams. This is especially important as Sellers age and may be experiencing health issues.
– Change of Direction / Burn out – for some Sellers who have been grinding it out for many years, selling provides a necessary change of direction in life, especially if there has been a burn-out or exhaustion of interest over the years.

Cons:
– Loss of Identity – an often ignored but very important consideration is whether the Seller’s self-identity is wrapped up in the ownership and operation of the business. If you sell, will you disappear, lose purpose, and not “be needed”.
– Loss of work community – for many Sellers, their social universe revolves around their friendships with staff, business associates, customers, and even competitors. If you sell, who will you socialize with.
– Loss of same income stream – Selling a business will generally change the Seller’s income stream and may impact business related tax deductions and employment benefits
– Loss of growth opportunities – Sellers are typically entrepreneurial and may have a hard time letting go of unrealized business expansion opportunities

3. WHAT WILL I DO IF I SELL?
Selling a business enables the Seller to essentially go out the door to a new world of experiences. If that sale is followed by retirement from actively working every day, then selling will bring lifestyle changes that should be understood and planned for.
– Marriage – For a married couple who have been accustomed to a certain amount of separate space for years, how will they adjust to being together more. For some this will be a positive, but not for all.
– Activities – being freed from the day to day demands of running a business opens time to explore new activities for which there previously was not enough time. Perhaps one of the greatest benefits of Over-55 Communities such as Del Webb (where I live), is that it provides a wealth of activities that a person can drop in on to experience and later decide if they want to get more involved. Deciding between many choices can be an enviable problem.
– Travel – Many Sellers take off on long-delayed cruises and other vacations. While this is a real benefit of selling, the travel generally does not last forever

These Preliminary Decisions shape everything.

In our next Article of this Series, we’ll cover the critical issue of Valuing the Business.

For over 20 years, the attorneys of BPE Law Group, P.C. have been assisting our clients the buying and selling of businesses and providing guidance and representation in the administration and growth of their businesses as well as their estate and succession planning.

If you have questions concerning business, real estate, estate planning or administration, or any other legal matter, give us a call at (916) 966-2260 to schedule a Consultation with one of our experienced attorneys. If you have an immediate question on this topic, please email Keith Dunnagan at kbdunnagan@bpelaw.com

This article is not intended to be legal advice, lending advice, or a specific recommendation of any particular lender or company, and should not be taken as such advice.